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Employees work on the outdoor units of split system air conditioners on an assembly line at the Daikin Air Conditioning India Pvt. factory in Neemrana, Rajasthan, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

How Higher Customs Duty Will Impact Appliances To Footwear Makers

Prices of air conditioners could rise while local makers of tyres to footwear expect a boost as India increased customs duty on 19 items to narrow the current account deficit and stem the rupee slide.

The Indian rupee has weakened about 12 percent this year, hitting new lows amid higher fuel prices and outflows by foreign investors. The falling currency has widened the current account deficit prompting a host of measures from the government including an increase in customs duty on goods that contributed Rs 86,000 crore to India’s imports in the previous financial year.

Here’s how the higher duty will impact each of the sectors:

Aviation Turbine Fuel

The government introduced a fresh customs duty of 5 percent compared with no levy earlier. The impact, however, will be small as India imported jet fuel worth Rs 1,103 crore in financial year 2017-18, according to the Petroleum Planning & Analysis Cell of India. That's small compared with the total fuel bill of Indian airlines for FY18 at close to Rs 30,000 crore.

Yet, it’s a surprise for the industry already reeling under high ATF prices.

Tyres

The customs duty on car radial tyres has been hiked from 10 percent to 15 percent.

AK Kinra, director-finance at JK Tyre said that the increase won't have an impact on the prices of car tyres as demand is met by local suppliers. "All type of tyres are now made in India."

Appliances

For air-conditioners and washing machines, the customs duty has been increased from 10 percent to 20 percent.

A higher levy would benefit contract manufacturers of air-conditioners and washing machines like Amber Enterprises Ltd. and Dixon Technologies Ltd. as the production is moved to India, CLSAsaid in a note. Within air-conditioners, 10 percent of imports are by fringe players whose share could now be taken by larger peers, it said.

The level of localisation in air conditioners, refrigerators and washing machines is 65 percent, 70 percent and 65 percent, respectively, according to data cited in Amber Enterprises’ red herring prospectus.

The customs duty on compressors was increased from 7.5 percent to 10 percent. Compressors imported from China contribute 20-25 percent of the cost of an air-conditioner, according to a Nirmal Bang report.

That would increase prices, said Kamal Nandi, business head and executive vice president of Godrej Appliances Ltd.

AC makers are already reeling under higher costs due to a weaker rupee and lower demand because of unseasonal summer rains. Nandi doesn’t expect prices of washing machines to rise since they are made in India.

Havells India Ltd.imports 70 percent of its Lloyds air-conditioners but has the option to shift to domestic contract manufacturers, said CLSA. Lloyds contributed 17 percent to its revenue in the year ended March. Havells is, however, setting up its air conditioner plant in Neemrana, Rajasthan.

For Voltas Ltd., window air-conditioners contribute 20 percent of the room AC sales where there will be a limited impact as these are made in India, according to a Goldman Sachs note. But since 60 percent of the room air-conditioners are imported and the segment contributed 50 percent of its overall revenue in FY18, the impact for Voltas is likely to be higher than competitors, it said.

Refrigerators

On refrigerators, the customs duty was increased from 10 percent to 20 percent.

Whirpool India and Godrej Appliances don’t expect a major impact as they make refrigerators in India.

Whirlpool imports the ones with a capacity of 400 litres, according to company filings.

Voltas Beko JV imports its entire range of refrigerators as its Sanand, Gujarat plant will starts operations in 2019, the management had told BloombergQuint earlier. So the higher duty will impact the company.

Over the long term, Goldman Sachs doesn’t expect a big impact of the customs duty hike for these companies as they start manufacturing their products in India.

Footwear

The government increased the customs duty to 25 percent from 20 percent. That’s expected to help the domestic manufacturers of footwear and bags like Bata Ltd., Relaxo Footwear Ltd., Liberty Shoes Ltd. and Khadim India Ltd.

Diamonds

For non-industrial cut and polished diamonds, lab grown diamonds, and cut and polished coloured gemstones, the duty was hiked from 5 percent to 7.5 percent.

Morgan Stanley said in a note that based on its channel checks, all diamonds and colored gemstones used by Titan Company Ltd. are cut and polished in India. As a result, there is no impact of the policy changes for India's largest jewellery maker, it said.

The hike in customs duty for manufactured jewellery from 15 percent to 20 percent, according to Morgan Stanley, will be marginally positive as it reduces the competitiveness of imported jewellery, especially in the lightweight fashion segment.